Employer costs for health insurance have fallen for a variety of
reasons: medical inflation has slowed and employers and employees are
migrating towards managed-care health care plans. A larger share of
employees must now pay part of the premiums for employer-provided health
plans, and the average premium paid by employees has grown in recent
years. In addition, the number of workers and retirees participating in
employer-sponsored health insurance has declined.

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GROWTH IN EMPLOYERS' HEALTH COSTS SLOWS

Source: Based on data from the Bureau of Labor Statistics,
Employment Cost Index, Private Industy.
The nominal percent changes in employer costs for health insurance
per hour worked are unpublished estimats from BLS.

GROWTH IN EMPLOYERS' HEALTH COSTS SLOWS

The rate of growth of employer's costs for health insurance has
steadily slowed since 1989, as measured by the Employment Cost Index.
This slower growth of health costs has been a major factor in the
deceleration in overall benefit costs for employers.

Since 1995, employers' costs for health insurance grew more slowly
than overall benefits or wages and salaries. For the 12 months ending in
June 1996, employer health insurance costs (not adjusting for inflation)
increased by 0.1% -- down from 0.6 and 5.0 percent increases during the
previous 12 month periods in 1995 and 1994, respectively.

Possible explanations for this slowdown include:

the rise in health care costs slowed considerably

employers switched to lower-cost managed-care plans

employees paid a larger share of the costs of employer-provided
health insurance

the number of employees receiving employer-sponsored health
insurance fell

The SWITCH TO MANAGED-CARE HEALTH PLANS

Distribution of Enrollment by Type of Health Plan,
Medium and Large Private Establishments

The SWITCH TO MANAGED-CARE HEALTH PLANS

Fee-for-service plans, which dominated employer-sponsored health
care a decade ago, are no longer the norm for employees' health
coverage. In 1984, fee-for-service plans covered 95% of the full-time
employees who participated in employer-sponsored health insurance in
medium and large private firms. By 1993, only half of employees were in
traditional fee-for-service plans, with the other half roughly evenly
distributed among HMO's and PPO's.

This trend towards managed care has continued. The share of
enrollment in conventional fee-for-service health plans fell an
additional 10 percentage points between 1993 and 1995, according to a
KPMG Peat Marwick survey of employer-sponsored health benefits.

The cost difference for employers differs by region, by firm size,
and according to the demographic composition of the workforce. However,
on average, medical plan costs per employee for HMO's and PPO's were
almost 20% less expensive than costs for traditional indemnity plans in
1995, according to benefits consulting firm Foster Higgins.

BURDEN SHARING

MORE EMPLOYEES PAY

EMPLOYEES PAY MORE

Source: Based on data from Bureau of Labor Statistics,
Employee Benefits Survey. Figures are for family ooverage in medium and
large private establishments. The CPI-U was used to convert nominal
monthly premium to 1993 dollars.

BURDEN SHARING: EMPLOYEES PAY MORE, AND MORE EMPLOYEES PAY

A growing number of employees are required to contribute toward
health-care premium costs for employer-provided health insurance. In
addition, growth in the average premiums paid by contributing employees
has outpaced inflation.

In 1983, slightly more than half (54%) of full-time employees in
medium and large firms contributed towards employer-provided health
premiums for family coverage. Ten years later, over three-quarters (76%)
of these employees paid health insurance premiums.

The real average monthly contribution paid by full-time employees
for employer- provided family health coverage has more than doubled from
$45 in 1983 to $107 in 1993.

Employees' share of premiums for employer-provided health insurance
continued to rise through 1994 and 1995. KPMG Peat Marwick reports that
the employee share of premiums in conventional family plans increased
from 23% in 1994 and 31% in 1995.

Employees in nonfederal jobs contributed 16% of the premium costs
for employer- provided health insurance in 1994, according to
unpublished estimates from the Health Care Financing Agency, up from
13.7% in 1987. If the employer share of health insurance premiums had
remained at its 1987 level through 1994, employees' contributions would
be $5.5 billion lower.

Source: Based on data from the Bureau of Labor
Statistics, Employee Benefits Survey.

DECLINE IN EMPLOYEE HEALTH COVERAGE

In 1993, 82% of full-time employees in medium and large private
firms participated in an employer-sponsored medical care plan, down from
96% in 1983. The percentage also fell in small private firms.

Enrollment decline may be attributed to

a decline in the number of employees and their dependents
participating in health plans sponsored by their employers. In
particular, many employees decline coverage because they are already
covered by a spouse's policy.

a decline in the number of employees offered employer-sponsored
health benefits, either because employers have dropped or restricted
coverage for their employees, or because of sectoral change in the
economy.

Executive Summary

The rate of growth of employer's costs for health insurance has slowed
since 1989, especially after 1995. This report explores the reasons behind
the fall in employer costs for health insurance. We find that:

the rise in health care costs slowed considerably

employers switched to lower-cost managed-care plans

employees paid a larger share of the costs of employer-provided
health insurance

the number of employees receiving employer-sponsored health insurance
fell

While the fall in employer health insurance costs is good news, it
appears that at least part of this decline is the result of more employees
shouldering a larger share of health insurance costs.

The rate of growth of employer's costs for health insurance has slowed
since 1989, and especially after 1995. Since 1995, employer costs for
health insurance have grown slower than wage and salary costs.

This reports finds that much of this decline is due to:

the rise in health care costs slowed considerably

employers switched to lower-cost managed-care plans

employees are paying a larger share of the costs of employer-
provided health insurance

the number of employees receiving employer-sponsored health
insurance fell.

In 1984 fee for service plans covered 95% of all full-time employees (in
medium and large firms) who participated in employer sponsored health
insurance plans. By 1993 only half of these workers were in
fee-for-service plans, the other half roughly evenly distributed among
HMO's and PPO's.

In 1983 slightly more than half of full-time employees in medium and
large firms contributed towards employer-provided health premiums for
family coverage. By 1993 that proportion had risen to over three-
quarters.

The real average monthly contribution paid by full time employees for
employer-provided family health coverage has more than doubled from
1983-1993.

Only 82% of full time employees in medium and large private firms
participated in an employer sponsored health plan in 1993, down from 96%
in 1983.

While the fall in employer health costs is good news, it appears that at
least part of this decline is the result of more employees shouldering a
larger share of health insurance costs.

TECHNICAL APPENDIX:

A LOOK AT EMPLOYERS' COSTS OF PROVIDING HEALTH BENEFITS

Overview

Employers' costs of providing benefits rose dramatically in the late
1980's. However, the growth rate in benefit costs began to slow in the
1990's, especially since 1995, as shown by the Employment Cost Index in
Figure 1.

Since 1995, employer benefit costs, particularly for health insurance,
have grown more slowly than wage and salary costs. This slower growth of
health costs has been a major factor in the deceleration in overall
benefit costs for employers. For the 12 months ending in June 1996,
employer health insurance costs, not adjusting for inflation, only
increased by 0.1% -- down from 0.6 and 5.0 percent increases during the
previous 12-month periods in 1995 and 1994, respectively.

This document summarizes the possible explanations of this deceleration
in health care benefit costs for employers.

Possible explanations include

the rise in health care costs slowed dramatically

employers switched to lower-cost health care plans

the number of employees receiving health benefits fell

employees paid a larger share of the costs of employer-provided
health insurance

other reasons

(change in usage of health care or breadth of coverage)

Possible Explanations for the Deceleration in Employers' Health Benefit
Costs

1-The rise in health care costs slowed dramatically

Health care prices grew much faster than overall inflation and wages
during the 1980's and early 1990's. Since 1993, the gap between medical
care inflation and overall inflation has fallen.

In 1991 and 1992, prices for medical care grew over 4% per year
faster than other prices, as measured by the Consumer Price Index. By
1995, the difference in medical and nonmedical inflation narrowed to
less than 2 percentage points. In the sixth months ending in June 1996,
medical prices grew slower than nonmedical prices.

2-Employers switched to lower-cost plans

Over the past decade, the range of health care plans provided by
employers has increased. In recent years, many employers have expanded the
range of plans they offer to include managed-care plans that have much
lower average employer premiums than traditional indemnity plans and that
tend to control utilization through gatekeepers. Some employers have
switched entirely to managed-care health plans, while others allow the
worker to choose between plans.

The best-known managed-care plans are health maintenance
organizations (HMO's) and preferred provider organizations (PPO's).
Managed-care plans tend to restrict patient choice, use primary-care
physicians as gatekeepers for specialized service, and negotiate fees
directly with health care providers. When offered a choice of plans,
many workers choose nontraditional plans because they have lower
deductibles and lower fees when services are rendered.

The cost-controlling mechanisms for managed-care plans result in
lower costs to participating employers. Foster Higgins' national survey
of employer-sponsored health plans reveals that the average medical plan
cost per employee (both employers' and employees' share) for HMO's was
19% lower (a $804 cost difference) than traditional indemnity plans in
1995. The average cost for PPO coverage was 18% lower ($781) than for a
traditional indemnity medical plan.

In 1984, 95% of employees in medium and large firms were in
fee-for-service plans. By 1993, these employees were about equally
likely to be in a managed-care health plan as in a traditional
fee-for-service plan, according to the Employee Benefits Survey data
shown in Figure 2. This represents a dramatic change in the type of
health care plans offered over the last decade.

Distribution of Enrollment, by Type of
Health Plan

Medium and Large Private Establishments

1984

1989

1991

1993

Fee for service

95%

74%

67%

50%

HMO

--

17%

17%

23%

PPO

5%

10%

16%

26%

Small Private Establishments

1990

1992

1994

Fee for service

74%

68%

55%

HMO

14%

14%

19%

PPO

13%

18%

24%

Source: Based on data from Bureau of Labor Statistics, Employee
Benefits Survey.

Figures are for full-time employees

Data from BLS's Employee Benefits Survey are not yet available for
large and medium employers after 1993, but other surveys suggest that
enrollment continued to shift from conventional to managed care plans in
1994 and 1995. According to data from KPMG Peat Marwick, enrollment in
traditional fee-for-service health plans fell by another 10 percentage
points between 1993 and 1995.

3-The number of employees receiving health benefits fell

For the majority of Americans, health insurance is still based on the
employment relationship. The share of workers participating in
employer-sponsored plans fell over the same period that growth in
employers' costs have fallen.

In 1993, 82% of full-time employees in medium and large firms
participated in an employer-sponsored medical care plan, down from 92%
in 1989, as shown in Figure 3. In small private firms, the percentage
fell from 69% in 1990 to 66% in 1994, according to the Employee Benefits
Survey by the BLS. Enrollment in employer-sponsored health insurance
coverage is much lower for part-time workers.

Enrollment may decline due to a fall in the number of employers
offering employer- provided insurance, or because employees, especially
low-wage employees, are electing to not enroll in health insurance
plans. A study of 1987 data from the Employee Benefits Supplement to
Current Population Survey shows that 76% of all workers age 18-64 were
offered health insurance by their employer. Of these, 87% participated
in the plan, 11% declined coverage because they were covered by another
plan, and 2% chose to remain uninsured (Long and Marquis, 1992). Those
who declined coverage entirely tend to be the lowest-wage workers, in
small firms, and in agricultural and construction occupations.

Structural change in the economy may also contribute to stagnation
in enrollment. Service-sector jobs have lower percentage of workers
eligible for health benefits, so that relative growth in service
employment implies a slowdown in the growth of the overall number of
workers getting employer-sponsored health benefits.

Another important factor in the issue of enrollment in
employer-provide health insurance is the enrollment of retirees. In
1994, 34% of retirees were covered by a former employer's health plan,
down from 44% in 1988, according to the Pension and Welfare Benefits
Administration.

4-Employees paid a larger share of the costs of
employer-provided health insurance

A growing number of employees are required to contribute towards health
care premium costs for employer-provided health insurance. In addition,
the average premiums paid by contributing employees have increased.

Employees in nonfederal jobs contributed 16% of the premium costs for
employer- provided health insurance in 1994, according to unpublished
estimates from the Health Care Financing Agency, up from 13.7% in 1987.
If the employer share of health insurance premiums had remained at its
1987 level through 1994, employees' contributions would be $5.5 billion
lower.

Employees' share of premiums for employer-provided health insurance
continue to rise through 1994 and 1995. KPMG Peat Marwick reports that
the employee share of premiums in conventional family plans increased
from 23% in 1994 to 31% in 1995.

·More employees paid some part of health insurance premiums

Fewer employers are offering no-cost health insurance. BLS's Employee
Benefits Survey shows that an increasing number of employers are requiring
that employees contribute to health care premiums, as shown on the left
side of Figure 4. Information from compensation experts suggests these
trends have continued into 1995.

Source: Based on data from Bureau of Labor Statistics,
Employee Benefits Survey

·Average premiums paid by employees have increased

Not only must more employees contribute to health insurance premiums,
average premiums paid by contributing employees have increased. The real
average premiums for family coverage in medium and large private
establishments are shown on the right side of Figure 4. The real value of
premiums has especially increased for employees in smaller establishments,
and for family coverage.

Real Average Monthly Employee Premiums , 1994 dollars

Medium and Large Establishments

1989

1991

1993

Single coverage

$30.25

$28.94

$32.36

Family coverage

$86.17

$105.51

$110.17

Small Private Establishments

1990

1992

1994

Single coverage

$28.49

$38.57

$40.97

Family coverage

$123.98

$159.02

$159.63

Source: Based on data from Bureau of Labor Statistics
Employee Benefits Survey.

The CPI-U was used to convert nominal figures into 1994 dollars.

The move to managed care plans has increased the share of premiums
paid by employees. KPMG Peat Marwick research states that the employer
share of total premium costs for individual coverage in HMO's is 80%,
versus 83% in PPO's and 88% in traditional fee-for-service plans in
1994.

The real average deductible paid by employees in non-HMO plans has
risen 8% between 1989 and 1993, (from $202 to $218) for medium and large
private establishments, according to BLS' Employee Benefits Survey.

Despite growing deductibles for traditional insurance plans,
out-of-pocket spending has not increased dramatically. Managed-care plans
reduce out-of- pocket expenses with low co-pays and often no deductibles.
Growth in individuals' out-of-pocket spending on health care was 3.0% in
1993 and 3.2% in 1994, according to the Health Care Financing
Administration. This is still higher than inflation, but alone cannot
explain the deceleration in employers' health benefits costs.

5 - Other explanations: Usage of health care declined

Measures of the intensity of use of medical services show that
utilization has fallen recently: community hospital admission rates are
down, the average length of a hospital stay has fallen, and hours worked
by physicians are stable. This is partly explained by lower coverage, but
also suggests managed-care plans have reduced utilization.

6 - Other explanations: Change in the breadth of service

The breadth of services covered under employer-sponsored health
insurance expanded for at least a decade to include well-baby care and
physical examinations. However, some firms have been carving out
supplemental health services like dental and vision plans from their
medical insurance plans. These benefits are still offered, but are
separate from medical plans and require separate deductibles and copays.
This de-bundling of services means that fewer employees are choosing to
carry the insurance for supplemental health services.

Conclusions

Employer costs for health insurance have fallen for a variety of
reasons: medical inflation has slowed and employers and employees are
migrating towards managed-care health care plans. A larger share of
employees must now pay part of the premiums for employer-provided health
plans, and the average premium paid by employees has grown in recent
years. In addition, the number of workers and retirees participating in
employer-sponsored health insurance has declined.

One cost that is not accounted for is the opportunity cost of time spent
by beneficiaries as they weave through the maze of gatekeepers and
precertification required for specialized procedures in managed-care
plans.

Unfortunately, the data can not tell us about the quality of health
care. Surveys of consumer sentiment about the quality of their health plan
do not give conclusive answers. In a nationwide survey sponsored by The
Robert Wood Johnson Foundation in 1995, 46% of respondents thought the
quality of the medical care they received had improved in the past three
years, and 25% thought it had worsened (Knickman and others, 1996).
However, a recent survey by Consumer Reports of their readers
showed that 10 % of readers did not get the medical treatment they needed
because their HMO discouraged it, while only 2% of readers in traditional
fee-for- service health insurance said they did not get the necessary care
("How Good is Your Health Plan?" August 1996).

References

Bureau of Labor Statistics. Various years. Employee Benefits in
Medium and Large Private Establishments. U.S. Department of Labor.

Various years. Employee Benefits in Small Private Establishments.
U.S. Department of Labor.